Deck 14: Financial Management Strategies

Question 1

Since there is a time value to money the spot exchange rate of a currency is always lower than the forward exchange rate.

Answer 1

False
Explanation: Differences between the spot and forward rate at the time of purchasing the contract reflect market expectations. The forward exchange rate may be higher or lower than the spot rate.

Question 2

Transaction risk is associated with imports or exports when the timing of the payment and the exchange of the goods and services are not simultaneous or in the same currency.

Answer 2

True
Explanation: Correct because transactions already entered into will have a variable value when converted into the home-country currency because the exchange rate has moved.

Question 3

A strategy to reduce transaction risk is to invoice the customer in the home-country currency.

Answer 3

True
Explanation: This is a strategy whereby the forex risk is transferred to the other party.

Question 4

Translation risk has important implications for the balance sheet of the firm.

Question 5

Economic exposure arises from current effects of forex movements on the competitiveness of the global factory.

Question 6

Transfer pricing raises questions about internal managerial efficiency and corporate governance.

Question 7

Low-tax jurisdictions provide reason for accumulating funds in that jurisdiction.

Question 8

Reinvoicing centres are centralised corporate financial management activities located in countries with more favourable regulatory environments.

Question 9

A currency option gives the buyer the right, but not the obligation to buy or sell a specific currency at a specific exchange rate on or before a psecific date.

Question 10

Exchange rate movements can affect demand for a global factory's products at home and abroad.

Question 11

The cost of covering transaction exposure at arm's length through hedging include _______ Please select all that apply.

A) Cost of financing and hedging
B) Cost of organising and managing personnel to arrange cover for the exposure
C) Insurance costs
D) Opportunity cost of not hedging

Question 12

The principle elements of translational exposure are _______ Please select all that apply.

A) Assets and liabilities denominated in foreign currencies
B) Profits and losses denominated in foreign currency
C) The principal payable on loans and debt
D) Share equity issued in another currency to raise equity

Question 13

This is one of the unique characteristics of the efficient market hypothesis: _______ Please select all that apply.

A) The market is not efficient
B) There are parties with superior market information
C) Participants act in their own interests
D) There are no information asymmetries

Question 14

Key players in the wholesale and retail currency market are _______ Please select all that apply.

A) Central banks
B) Foreign exchange brokers
C) Commercial banks and other foreign exchange dealers
D) Firms

Question 15

The depreciation in the value of the host country's currency relative to a home country does _______ Please select all that apply.

A) Stimulate FDI outflows
B) Stimulate FDI inflows
C) Have no impact on FDI flows
D) Attract different forms of governance

Question 16

_______ are primarily used for longer term revenue conversion purposes than to deal with short-term conversion exposure.

A) Currency options
B) Futures hedge
C) Currency swaps
D) Money market hedging

Question 17

It is often claimed that the very existence of transfer pricing is indistinguishable from _______

A) Tax evasion or avoidance
B) Transparent financial management
C) Payments for intra-firm trade
D) Payments of royalties

Question 18

Transfer price manipulation enables a global factory to _______

A) Avoid price controls
B) Set transparent prices
C) To reduce country risk exposure by increasing revenues and profits
D) To reduce revenues and profits because of increasing country risk

Question 19

_______ occurs when subsidiaries settle intra-network currency debts for the net amount owed in a currency rather than the gross amount.

A) Netting
B) Varying the speed of internal payments
C) Leading
D) Lagging

Question 20

_______ contracts are a regular feature of most business trading across borders in that they are an instrument to cover the currency risk of transaction.

A) Forward market hedge
B) Futures hedge
C) Currency option
D) Currency swap